Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32318
DEVON ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
73-1567067
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
identification No.)
333 West Sheridan Avenue, Oklahoma City, Oklahoma
73102-5015
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (405) 235-3611
Former name, address and former fiscal year, if changed from last report: Not applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.10 per share
DVN
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
On July 20, 2022, 654.8 million shares of common stock were outstanding.
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Item 1.
Financial Statements
6
Consolidated Statements of Comprehensive Earnings
Consolidated Statements of Cash Flows
7
Consolidated Balance Sheets
8
Consolidated Statements of Equity
9
Notes to Consolidated Financial Statements
10
Note 1 – Summary of Significant Accounting Policies
Note 2 – Acquisitions and Divestitures
11
Note 3 – Derivative Financial Instruments
12
Note 4 – Share-Based Compensation
13
Note 5 – Restructuring and Transaction Costs
15
Note 6 – Other, Net
Note 7 – Income Taxes
16
Note 8 – Net Earnings Per Share
17
Note 9 – Other Comprehensive Earnings (Loss)
Note 10 – Supplemental Information to Statements of Cash Flows
18
Note 11 – Accounts Receivable
Note 12 – Property, Plant and Equipment
Note 13 – Debt and Related Expenses
19
Note 14 – Leases
20
Note 15 – Asset Retirement Obligations
Note 16 – Stockholders’ Equity
Note 17 – Commitments and Contingencies
21
Note 18 – Fair Value Measurements
23
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Executive Overview
Results of Operations
26
Capital Resources, Uses and Liquidity
34
Critical Accounting Estimates
37
Non-GAAP Measures
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
41
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
42
Signatures
43
2
DEFINITIONS
Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon,” the “Company” and “Registrant” refer to Devon Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
"2017 Plan" means the Devon Energy Corporation 2017 Long-Term Incentive Plan.
"2022 Plan" means the Devon Energy Corporation 2022 Long-Term Incentive Plan.
“Bbl” or “Bbls” means barrel or barrels.
“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.
“Btu” means British thermal units, a measure of heating value.
“Canada” means the division of Devon encompassing oil and gas properties located in Canada. On June 27, 2019, all of Devon’s Canadian operating assets and operations were divested. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.
“Catalyst” means Catalyst Midstream Partners, LLC.
“CDM” means Cotton Draw Midstream, L.L.C.
“DD&A” means depreciation, depletion and amortization expenses.
“ESG” means environmental, social and governance.
“G&A” means general and administrative expenses.
“GAAP” means U.S. generally accepted accounting principles.
“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.
“LOE” means lease operating expenses.
“MBbls” means thousand barrels.
“MBoe” means thousand Boe.
“Mcf” means thousand cubic feet.
“Merger” means the merger of Merger Sub with and into WPX, with WPX continuing as the surviving corporation and a wholly-owned subsidiary of the Company, pursuant to the terms of the Merger Agreement.
“Merger Agreement” means that certain Agreement and Plan of Merger, dated September 26, 2020, by and among the Company, Merger Sub and WPX.
“Merger Sub” means East Merger Sub, Inc., a wholly-owned subsidiary of the Company.
“MMBoe” means million Boe.
“MMBtu” means million Btu.
3
“MMcf” means million cubic feet.
“N/M” means not meaningful.
"NCI" means noncontrolling interests.
“NGL” or “NGLs” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC” means Organization of the Petroleum Exporting Countries.
“SEC” means United States Securities and Exchange Commission.
“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.
“TSR” means total shareholder return.
“U.S.” means United States of America.
“VIE” means variable interest entity.
“WPX” means WPX Energy, Inc.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/d” means per day.
“/MMBtu” means per MMBtu.
4
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially and adversely from our expectations due to a number of factors, including, but not limited to:
All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.
5
Item 1. Financial Statements
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
(Unaudited)
Oil, gas and NGL sales
$
4,100
2,154
7,275
3,911
Oil, gas and NGL derivatives
(170
)
(703
(853
(1,231
Marketing and midstream revenues
1,696
966
3,016
1,787
Total revenues
5,626
2,417
9,438
4,467
Production expenses
729
513
1,347
971
Exploration expenses
Marketing and midstream expenses
1,700
965
3,024
1,807
Depreciation, depletion and amortization
528
536
1,017
1,003
Asset dispositions
(14
(87
(15
(119
General and administrative expenses
84
94
178
201
Financing costs, net
80
169
157
Restructuring and transaction costs
—
212
Other, net
(51
(43
Total expenses
3,131
2,113
5,681
4,195
Earnings before income taxes
2,495
304
3,757
272
Income tax expense (benefit)
557
824
(205
Net earnings
1,938
261
2,933
477
Net earnings attributable to noncontrolling interests
Net earnings attributable to Devon
1,932
256
2,921
469
Net earnings per share:
Basic net earnings per share:
2.94
0.38
4.42
0.70
Diluted net earnings per share:
2.93
4.40
Comprehensive earnings:
Other comprehensive earnings, net of tax:
Pension and postretirement plans
1
Other comprehensive earnings, net of tax
1,939
264
2,935
503
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to Devon
1,933
259
2,923
495
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash from operating activities:
Leasehold impairments
Amortization of liabilities
(9
(7
Total losses on commodity derivatives
170
703
853
1,231
Cash settlements on commodity derivatives
(472
(367
(816
(599
Gains on asset dispositions
Deferred income tax expense (benefit)
305
(219
Share-based compensation
61
Early retirement of debt
(10
(30
Other
(17
Changes in assets and liabilities, net
198
55
(110
Net cash from operating activities
2,678
1,093
4,515
1,685
Cash flows from investing activities:
Capital expenditures
(573
(504
(1,110
(1,003
Acquisitions of property and equipment
(100
(5
(101
Divestitures of property and equipment
49
35
64
WPX acquired cash
344
Distributions from equity method investments
Contributions to equity method investments
(21
Net cash from investing activities
(670
(452
(1,196
(582
Cash flows from financing activities:
Repayments of long-term debt
(710
(1,243
(32
(59
Repurchases of common stock
(324
(535
Dividends paid on common stock
(830
(229
(1,497
(432
Contributions from noncontrolling interests
Distributions to noncontrolling interests
(13
Acquisition of noncontrolling interests
(24
Shares exchanged for tax withholdings and other
(12
(85
(42
Net cash from financing activities
(1,171
(982
(2,130
(1,806
Effect of exchange rate changes on cash
(3
Net change in cash, cash equivalents and restricted cash
832
(339
1,186
(698
Cash, cash equivalents and restricted cash at beginning of period
2,625
1,878
2,271
2,237
Cash, cash equivalents and restricted cash at end of period
3,457
1,539
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
3,300
1,348
Restricted cash
191
Total cash, cash equivalents and restricted cash
CONSOLIDATED BALANCE SHEETS
June 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash, cash equivalents and restricted cash
Accounts receivable
2,348
1,543
Other current assets
546
435
Total current assets
6,351
4,249
Oil and gas property and equipment, based on successful efforts accounting, net
13,588
13,536
Other property and equipment, net ($122 million and $111 million related to CDM in 2022 and 2021, respectively)
1,525
1,472
Total property and equipment, net
15,113
15,008
Goodwill
753
Right-of-use assets
236
235
Investments
423
402
Other long-term assets
318
378
Total assets
23,194
21,025
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
668
500
Revenues and royalties payable
2,108
1,456
Other current liabilities
1,318
1,131
Total current liabilities
4,094
3,087
Long-term debt
6,461
6,482
Lease liabilities
252
Asset retirement obligations
452
468
Other long-term liabilities
949
1,050
Deferred income taxes
287
Stockholders' equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 656 million and 663 million shares in 2022 and 2021, respectively
66
Additional paid-in capital
7,060
7,636
Retained earnings
3,107
1,692
Accumulated other comprehensive loss
(130
(132
Treasury stock, at cost, 0.2 million shares in 2022
Total stockholders’ equity attributable to Devon
10,090
9,262
Noncontrolling interests
136
137
Total equity
10,226
9,399
Total liabilities and equity
CONSOLIDATED STATEMENTS OF EQUITY
Additional
Comprehensive
Common Stock
Paid-In
Retained
Earnings
Treasury
Noncontrolling
Total
Shares
Amount
Capital
(Loss)
Stock
Interests
Equity
Three Months Ended June 30, 2022
Balance as of March 31, 2022
661
7,371
2,013
(131
(19
135
9,435
Restricted stock grants, net of cancellations
Common stock repurchased
(329
Common stock retired
(1
(334
335
Common stock dividends
(838
Balance as of June 30, 2022
656
Three Months Ended June 30, 2021
Balance as of March 31, 2021
675
67
8,172
218
(104
133
8,486
(2
(231
(4
Balance as of June 30, 2021
677
68
8,189
243
8,535
Six Months Ended June 30, 2022
Balance as of December 31, 2021
663
(634
(620
621
(1,506
Six Months Ended June 30, 2021
Balance as of December 31, 2020
382
38
2,766
208
(127
134
3,019
(40
(434
Common stock issued
290
29
5,403
5,432
(8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2021 Annual Report on Form 10-K. The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2022 and 2021 and Devon’s financial position as of June 30, 2022.
Devon and WPX completed an all-stock merger of equals on January 7, 2021. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. See Note 2 for further discussion.
Restricted Cash
As of June 30, 2022, Devon classified approximately $140 million of cash as restricted cash on the consolidated balance sheets for obligations retained related to the Barnett Shale assets and the Canadian business. Cash payments for these charges related to the Barnett assets and Canada business total approximately $10 million per quarter.
Variable Interest Entity
Cotton Draw Midstream, L.L.C. (“CDM”) is a joint venture entity formed by Devon and an affiliate of QL Capital Partners, LP. CDM provides gathering, compression and dehydration services for natural gas production in the Cotton Draw area of the Delaware Basin. Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in, and disclosed parenthetically, on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, if material, on Devon's consolidated balance sheets.
In conjunction with the Merger, Devon acquired an interest in Catalyst, which is a joint venture established among WPX, an affiliate of Howard Energy Partners, LLC (“HEP”) and certain other investors, to develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the arrangement, Devon and a holding company owned by the other joint venture investors each have a 50% voting interest in the joint venture legal entity, and HEP serves as the operator. Through 2038, Devon’s production from 50,000 net acres in the Stateline area of the Delaware Basin has been dedicated to Catalyst subject to fixed-fee oil gathering and natural gas processing agreements. The agreements do not include any minimum volume commitments. Devon accounts for the investment in Catalyst as an equity method investment.
Devon's investment in Catalyst is shown within investments on the consolidated balance sheets and Devon's share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
Carrying Amount
% Interest
Catalyst
50%
354
368
Various
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.
Oil
2,970
1,686
5,376
3,017
Gas
188
864
390
NGL
573
280
1,035
504
952
610
1,728
1,109
322
531
281
422
222
757
397
Total revenues from contracts with customers
5,796
3,120
10,291
5,698
2. Acquisitions and Divestitures
WPX Merger
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. WPX was an oil and gas exploration and production company with assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. No fractional shares of Devon’s common stock were issued in the Merger, and holders of WPX common stock instead received cash in lieu of fractional shares of Devon common stock, if any. Based on the closing price of Devon’s common stock on January 7, 2021, the total value of Devon common stock issued to holders of WPX common stock as part of this transaction was approximately $5.4 billion. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. The final allocation of the total purchase price of WPX to the identifiable assets acquired and the liabilities assumed was finalized at December 31, 2021.
Acquisitions
In July 2022, Devon completed its acquisition of producing properties and leasehold interests located in the Williston Basin for cash consideration of approximately $830 million, net of purchase price adjustments. In the second quarter of 2022, Devon paid an $87 million cash deposit related to this acquisition, which is included within other current assets in the June 30, 2022 consolidated balance sheet and within acquisitions of property and equipment in the consolidated statement of cash flows.
Divestitures
In the first quarter of 2021, Devon completed the sale of non-core assets in the Rockies for proceeds of $9 million, net of purchase price adjustments, and recognized a $35 million gain related to the sale. Devon received $4 million in contingent earnout payments related to this transaction in the first quarter of 2022 with the potential for up to an additional $4 million in the future. The total estimated proved reserves associated with these divested assets was approximately 3 MMBoe.
Contingent Earnout Payments
Devon is entitled to contingent earnout payments associated with the sale of its Barnett Shale assets in 2020 with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. Devon received $65 million in contingent earnout payments related to this transaction in the first quarter of 2022 and could receive up to an additional $195 million in contingent earnout payments for the remaining performance periods depending on future commodity prices. The valuation of the future contingent earnout payments included within other current assets and other long-term assets in the June 30, 2022 consolidated balance sheet was approximately $65 million and $60 million, respectively. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement.
Objectives and Strategies
Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of June 30, 2022, Devon did not have any open interest rate swap contracts.
Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.
Counterparty Credit Risk
By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels. As of June 30, 2022, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties. Given Devon's current credit ratings and the terms of the underlying contracts, Devon is not currently required to post collateral to its counterparties with respect to its open derivative positions, and we would not be required to post any such collateral as a result of any change to the amount of Devon's net liability for such positions.
Commodity Derivatives
As of June 30, 2022, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.
Price Swaps
Price Collars
Period
Volume(Bbls/d)
WeightedAveragePrice ($/Bbl)
WeightedAverage FloorPrice ($/Bbl)
WeightedAverageCeiling Price($/Bbl)
Q3-Q4 2022
35,000
44.61
36,500
57.96
78.08
Q1-Q4 2023
6,193
61.32
97.65
Oil Basis Swaps
Index
Weighted AverageDifferential to WTI($/Bbl)
BRENT
1,000
(7.75
NYMEX Roll
29,000
0.45
Midland Sweet
12,296
0.52
As of June 30, 2022, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index and the end of month NYMEX index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
Price Swaps (1)
Price Collars (2)
Volume (MMBtu/d)
Weighted Average Price ($/MMBtu)
Weighted Average Floor Price ($/MMBtu)
Weighted AverageCeiling Price ($/MMBtu)
117,500
3.08
193,000
3.05
4.55
8,658
5.24
96,436
3.55
7.63
Natural Gas Basis Swaps
Volume(MMBtu/d)
Weighted AverageDifferential toHenry Hub($/MMBtu)
El Paso Natural Gas
50,000
(0.85
Houston Ship Channel
40,000
(0.15
WAHA
70,000
(0.57
125,000
(1.59
(0.13
(0.51
Q1-Q4 2024
As of June 30, 2022, Devon did not have any open NGL positions.
Financial Statement Presentation
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the consolidated balance sheets. Amounts related to contracts allowed to be netted upon payment subject to a master netting arrangement with the same counterparty are reported on a net basis in the consolidated balance sheets. The tables below present a summary of these positions as of June 30, 2022 and December 31, 2021.
Gross Fair Value
Amounts Netted
Net Fair Value
Balance Sheet Classification
Commodity derivatives:
Short-term derivative asset
(26
Long-term derivative asset
31
30
Short-term derivative liability
(672
(646
(579
(575
Long-term derivative liability
Total derivative liability
(606
(569
In the second quarter of 2022, Devon's stockholders approved the 2022 Plan. The 2022 Plan replaces the 2017 Plan. From the effective date of the 2022 Plan, no further awards may be made under the 2017 Plan; however, awards previously granted will continue to be governed by the terms of the respective award documents. The 2022 Plan authorizes the grant of nonqualified and incentive stock options, restricted stock awards or units and stock appreciation rights to eligible employees. Restricted stock awards or restricted stock units granted under the 2022 Plan may be subject to performance-based conditions. The 2022 Plan also authorizes the grant of nonqualified stock options, restricted stock awards or units and stock appreciation rights to non-employee directors. To
calculate the number of shares that may be granted in awards under the 2022 Plan, options and stock appreciation rights represent one share and other awards represent 1.74 shares.
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in 2021 in conjunction with the reduction of workforce described in Note 5 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
G&A
Related income tax benefit
Under its approved long-term incentive plan, Devon grants share-based awards to its employees. The following table presents a summary of Devon’s unvested restricted stock awards and units and performance share units granted under the plan.
Restricted Stock Awards & Units
Performance Share Units
Awards/Units
WeightedAverageGrant-DateFair Value
Units
(Thousands, except fair value data)
Unvested at 12/31/21
7,656
22.15
2,076
24.12
Granted
1,296
52.98
964
44.05
Vested
(3,104
23.00
(1,194
28.91
Forfeited
33.03
68.68
Unvested at 6/30/22
5,789
28.49
1,841
(1)
31.33
The following table presents the assumptions related to the performance share units granted in 2022, as indicated in the previous summary table. The grants in the previous summary table also include the impact of performance share units granted in a prior year that vested higher than 100% of target due to Devon's TSR performance compared to our peers.
Grant-date fair value
Risk-free interest rate
1.81
%
Volatility factor
70.1
Contractual term (years)
2.89
The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of June 30, 2022.
Restricted Stock
Performance
Share Units
Unrecognized compensation cost
109
27
Weighted average period for recognition (years)
2.7
1.9
14
5. Restructuring and Transaction Costs
The following table summarizes Devon’s restructuring and transaction costs.
Restructuring costs
166
Transaction costs
46
Total costs
In conjunction with the Merger closing, Devon recognized $166 million of restructuring expenses during the first six months of 2021 related to employee severance and termination benefits, settlements and curtailments from defined retirement benefits and contract terminations. Of these expenses, $40 million and $21 million resulted from settlements and curtailments of defined retirement benefits and accelerated vesting of share-based grants, respectively, which were non-cash charges. Additionally, in conjunction with the Merger closing, Devon recognized $46 million of transaction costs primarily comprised of bank, legal and accounting fees.
The following table summarizes Devon’s restructuring liabilities.
Current
Long-term
Liabilities
111
149
Changes related to prior years' restructurings
(22
28
99
127
172
48
33
83
122
205
6. Other, Net
The following table summarizes Devon's other expenses (income) presented in the accompanying consolidated comprehensive statement of earnings.
Estimated future obligation under a performance guarantee
(18
(96
Ukraine charitable pledge
Asset retirement obligation accretion
Severance and other non-income tax refunds
(39
The first six months of 2022 includes a $96 million benefit related to the revision of a future obligation under a performance guarantee liability for previously divested assets. Due to improved commodity prices and market conditions, the purchaser of these assets was able to fully satisfy a $35 million obligation due in the first quarter of 2022. Further, during the first quarter of 2022, Devon also reduced the estimated future exposure of the performance guarantee by $61 million based on probability-weighted cash flows for the remainder of the contract term of four years. Additionally, the first six months of 2021 included an $18 million benefit related to the revision of a future obligation under a performance guarantee liability for which the purchaser of these assets was able to partially satisfy an obligation.
The first six months of 2022 also includes a $20 million pledge for humanitarian relief for the Ukrainian people and surrounding countries supporting refugees.
During the first six months of 2021, Devon received severance and other non-income tax refunds of $39 million.
7. Income Taxes
The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.
Current income tax expense
355
Total income tax expense (benefit)
U.S. statutory income tax rate
State income taxes
0
Subsidiary reorganization
Deferred tax asset valuation allowance
%)
(116
Effective income tax rate
22
(75
Prior to December 31, 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized approximately $250 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon had recognized on its U.S. federal deferred tax assets in the first quarter of 2021.
Due to significant increases in commodity pricing and projections of future income, in the fourth quarter of 2021, Devon reassessed its evaluation of the realizability of deferred tax assets in future years and determined that a U.S. federal valuation allowance was no longer necessary at December 31, 2021.
In the fourth quarter of 2020, Devon recorded a deferred tax asset representing the deductible outside basis difference in its investment in a consolidated subsidiary. In the second quarter of 2021, Devon realized this deferred tax asset, increasing its U.S. federal net operating loss carryforwards by $1.8 billion.
In the table above, the "other" effect for 2021 is composed primarily of permanent differences related to costs incurred in connection with the Merger. Such items represent $18 million of income tax expense in the first six months of 2021.
Pursuant to the tax sharing agreement with The Williams Companies, Inc. ("Williams") assumed in the Merger, Devon has remained responsible for the tax from audit adjustments related to the WPX business for periods prior to WPX’s spin-off from Williams on December 31, 2011. The 2011 consolidated tax filing by Williams was audited by the Internal Revenue Service (“IRS”) during which the IRS proposed adjustments related to the WPX business. After a lengthy appeals process, these matters were effectively settled with the IRS during the second quarter of 2022 upon review and approval by the Joint Committee on Taxation. Accordingly, Devon believes these matters have now been effectively settled with no material impacts to Devon.
The following table reconciles net earnings and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings per share.
Net earnings:
Attributable to participating securities
(33
Basic and diluted earnings
1,915
253
2,888
464
Common shares:
Common shares outstanding - total
658
666
(6
Common shares outstanding - basic
652
671
654
660
Dilutive effect of potential common shares issuable
Common shares outstanding - diluted
673
662
Basic
Diluted
9.Other Comprehensive Earnings (Loss)
Components of other comprehensive earnings (loss) consist of the following:
Pension and postretirement benefit plans:
Beginning accumulated pension and postretirement benefits
Recognition of net actuarial loss and prior service cost in earnings (1)
Settlement of pension benefits (2)
Other (3)
Income tax expense
Accumulated other comprehensive loss, net of tax
Changes in assets and liabilities, net:
(346
(803
(163
88
78
75
Accounts payable and revenues and royalties payable
540
72
787
93
52
101
(81
(84
(108
Supplementary cash flow data:
Interest paid
85
105
185
219
Income taxes paid (refunded)
(106
110
(112
Components of accounts receivable include the following:
1,520
984
Joint interest billings
192
158
602
370
Gross accounts receivable
2,356
1,550
Allowance for doubtful accounts
Net accounts receivable
12.Property, Plant and Equipment
The following table presents the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.
Property and equipment:
Proved
39,216
38,051
Unproved and properties under development
937
1,081
Total oil and gas
40,153
39,132
Less accumulated DD&A
(26,565
(25,596
Oil and gas property and equipment, net
Other property and equipment
2,224
2,139
(699
(667
Other property and equipment, net (1)
Property and equipment, net
See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.
8.25% due August 1, 2023
242
5.25% due September 15, 2024
472
5.85% due December 15, 2025
485
7.50% due September 15, 2027
73
5.25% due October 15, 2027
5.875% due June 15, 2028
325
4.50% due January 15, 2030
585
7.875% due September 30, 2031
7.95% due April 15, 2032
366
5.60% due July 15, 2041
1,250
4.75% due May 15, 2042
750
5.00% due June 15, 2045
Net premium on debentures and notes
126
Debt issuance costs
(28
Total long-term debt
Retirement of Senior Notes
In the first six months of 2021, Devon redeemed $43 million of the 6.00% senior notes due 2022, $175 million of the 5.875% senior notes due 2028, $315 million of the 4.50% senior notes due 2030, $210 million of the 5.35% senior notes due 2027 and $500 million of the 5.75% senior notes due 2026. In the first six months of 2021, Devon recognized $30 million of gains on early retirement of debt, consisting of $89 million of non-cash premium accelerations, partially offset by $59 million of cash retirement costs. The gain on early retirement is included in net financing costs in the consolidated comprehensive statements of earnings.
Credit Lines
Devon has a $3.0 billion Senior Credit Facility. As of June 30, 2022, Devon had no outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65%. Under the terms of the credit agreement, total capitalization is adjusted to add back non-cash financial write-downs such as impairments. As of June 30, 2022, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 23.9%.
Net Financing Costs
The following schedule includes the components of net financing costs.
Interest based on debt outstanding
98
203
Gain on early retirement of debt
Interest income
Total net financing costs
14. Leases
The following table presents Devon’s right-of-use assets and lease liabilities as of June 30, 2022 and December 31, 2021.
Finance
Operating
207
211
Lease liabilities:
Current lease liabilities (1)
Long-term lease liabilities
248
247
Total lease liabilities
285
255
278
(1)Current lease liabilities are included in other current liabilities on the consolidated balance sheets.
Devon’s right-of-use operating lease assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Devon’s right-of-use financing lease assets are related to real estate.
The following table presents the changes in Devon’s asset retirement obligations.
Asset retirement obligations as of beginning of period
369
Assumed WPX obligations
Liabilities incurred
Liabilities settled and divested
(47
Revision of estimated obligation
(35
Accretion expense on discounted obligation
Asset retirement obligations as of end of period
465
Less current portion
Asset retirement obligations, long-term
450
During the first six months of 2022, Devon reduced its asset retirement obligations by $35 million primarily due to extended retirement dates for oil and gas assets, partially offset by inflation-driven increases to current settlement costs.
Share Repurchases
In November 2021, Devon authorized a share repurchase program of $1.0 billion with a December 31, 2022 expiration date. In February 2022, the Board of Directors authorized an expansion of the share repurchase program to $1.6 billion, and in May 2022, authorized a further expansion to $2.0 billion and extended the expiration date to May 4, 2023. The table below provides information regarding purchases of Devon’s common stock under the $2.0 billion share repurchase program (shares in thousands).
Total Number ofShares Purchased
Dollar Value ofShares Purchased
Average Price Paidper Share
2021:
Fourth quarter
13,983
589
42.15
2022:
First quarter
3,979
230
57.74
Second quarter
5,052
63.07
Total plan
23,014
1,137
49.44
Dividends
Upon completion of the Merger, Devon continued its commitment to pay a quarterly dividend at a fixed rate and instituted a variable quarterly dividend, which is dependent on quarterly cash flows, among other factors. Devon raised its fixed quarterly dividend by 45%, to $0.16 per share, beginning in the first quarter of 2022 and again by 13%, to $0.18 per share, beginning in the third quarter of 2022. The following table summarizes Devon’s fixed and variable dividends for the first six months of 2022 and 2021, respectively.
Fixed
Variable
Rate Per Share
558
667
1.00
725
830
1.27
Total year-to-date
214
1,283
1,497
76
0.30
154
229
0.34
151
432
In August 2022, Devon announced a cash dividend in the amount of $1.55 per share payable in the third quarter of 2022. The dividend consists of an $0.18 per share fixed quarterly dividend and a $1.37 per share variable quarterly dividend and will total approximately $1.0 billion.
Noncontrolling Interests
The noncontrolling interests’ share of CDM’s net earnings and the contributions from and distributions to the noncontrolling interests are presented as components of equity.
Devon is party to various legal actions arising in connection with its business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to likely involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.
Royalty Matters
Numerous oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, paid royalty proceeds in an untimely manner without including required interest, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims. As of June 30, 2022, Devon has accrued approximately $25 million in other current liabilities pertaining to such royalty matters.
Environmental and Climate Change Matters
Devon’s business is subject to numerous federal, state, tribal and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties, as well as remediation costs. Although Devon believes that it is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its business, there can be no assurance that this will continue in the future.
Beginning in 2013, various parishes in Louisiana filed suit against numerous oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water
bodies located in the coastal zone of Louisiana. The plaintiffs’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against these claims.
The State of Delaware and various municipalities and other governmental and private parties in California have filed legal proceedings against numerous oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against the proceedings.
Other Indemnifications and Legacy Matters
Pursuant to various sale agreements relating to divested businesses and assets, Devon has indemnified various purchasers against liabilities that they may incur with respect to the businesses and assets acquired from Devon. Additionally, federal, state and other laws in areas of former operations may require previous operators (including corporate successors of previous operators) to perform or make payments in certain circumstances where the current operator may no longer be able to satisfy the applicable obligation. Such obligations may include plugging and abandoning wells, removing production facilities or performing requirements under surface agreements in existence at the time of disposition.
In November 2020, the Department of the Interior, Bureau of Safety and Environmental Enforcement, ordered several oil and gas operators, including Devon, to perform decommissioning and reclamation activities related to two California offshore oil and gas production platforms and related facilities. The current operator and owner of the platforms contends that it does not have the financial ability to perform these obligations and relinquished the related federal lease in October 2020. In response to the apparent insolvency of the current operator, the government has ordered the former operators and alleged former lease record title owners to decommission the platforms and related facilities. The government contends that an alleged corporate predecessor of Devon owned a partial interest in the subject lease and platforms. Although Devon cannot predict the ultimate outcome of this matter, Devon denies any obligation to decommission the subject platforms, has appealed the order, and believes any decommissioning obligation related to the subject platforms should be assumed by others.
The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at June 30, 2022 and December 31, 2021, as applicable. Therefore, such financial assets and liabilities are not presented in the following table.
Fair Value Measurements Using:
Carrying
Total Fair
Level 1
Level 2
Level 3
Value
Inputs
June 30, 2022 assets (liabilities):
Cash equivalents
3,063
Commodity derivatives
(647
Debt
(6,461
(6,440
Contingent earnout payments
129
December 31, 2021 assets (liabilities):
1,421
(577
(6,482
(7,644
184
The following methods and assumptions were used to estimate the fair values in the table above.
Level 1 Fair Value Measurements
Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.
Level 2 Fair Value Measurements
Commodity derivatives – The fair value of commodity derivatives is estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.
Debt – Devon’s debt instruments do not consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.
Level 3 Fair Value Measurements
Contingent Earnout Payments – Devon has the right to receive contingent consideration related to the Barnett and non-core Rockies asset divestitures based on future oil and gas prices. These values were derived using a Monte Carlo valuation model and qualify as a level 3 fair value measurement. For additional information, see Note 2.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis addresses material changes in our results of operations for the three-month and six-month periods ended June 30, 2022, compared to previous periods and in our financial condition and liquidity since December 31, 2021. For information regarding our critical accounting policies and estimates, see our 2021 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The Merger has helped us become a leading unconventional oil producer in the U.S., with an asset base underpinned by premium acreage in the economic core of the Delaware Basin. This strategic combination accelerated our transition to a cash-return business model, including the implementation of a fixed plus variable dividend strategy. In July 2022, we acquired additional producing properties and leasehold interests in the Williston Basin that are complementary to our existing acreage, offer operational synergies and add high-quality inventory. We remain focused on building economic value by executing on our strategic priorities of moderating growth, emphasizing capital efficiencies, maintaining and improving operational and corporate synergies, reducing reinvestment rates to maximize free cash flow, maintaining low leverage, delivering cash returns to our shareholders and pursuing ESG excellence. Our recent performance highlights for these priorities include the following items:
We remain committed to capital discipline and delivering the objectives that underpin our current plan. Those objectives prioritize value creation through moderated capital investment and production growth, particularly with a view of the steep backwardation in commodity prices, supply chain constraints and the economic uncertainty arising from recent geopolitical events.
Commodity prices strengthened throughout 2021 and oil prices have continued to remain high in the first six months of 2022, which has significantly improved our earnings and cash flow generation. The increase in commodity prices during 2021 was primarily driven by increased demand resulting from the initial recovery from the COVID-19 pandemic, as well as OPEC+ and other oil and natural gas producers not rapidly increasing production levels. The military conflict between Russia and Ukraine and related economic sanctions imposed on Russia has further exacerbated supply shortages, causing oil prices to increase even more during the first six months of 2022.
Trends of our quarterly earnings, operating cash flow, EBITDAX and capital expenditures are shown below. “Core earnings” and “EBITDAX” are financial measures not prepared in accordance with GAAP. For a description of these measures, including reconciliations to the comparable GAAP measures, see “Non-GAAP Measures” in this Item 2.
Our earnings increased from the first quarter of 2022 to the second quarter of 2022 primarily due to higher commodity prices as well as higher sold volumes resulting from winter weather downtime experienced in the first quarter of 2022. WTI and Henry Hub increased 15% and 45%, respectively, from the first quarter of 2022 to the second quarter of 2022. This contributed to a 19% increase in our unhedged combined realized prices.
Our net earnings in recent quarters have been significantly impacted by non-cash adjustments to the value of our commodity hedges. Net earnings in the second quarter of 2021 and the first quarter of 2022 each included a hedge valuation loss, net of tax of $0.3 billion. Net earnings in the fourth quarter of 2021 and second quarter of 2022 each included a hedge valuation gain, net of tax of $0.4 billion and $0.2 billion, respectively. Excluding these amounts, our core earnings have been more stable over recent quarters and continue to trend upward while remaining sensitive to volatile commodity prices.
Like earnings, our operating cash flow is sensitive to volatile commodity prices. Our cash flow and EBITDAX have continued to trend upward primarily due to improved commodity prices and overall market conditions as well as strong operating performance.
We exited the second quarter of 2022 with $6.5 billion of liquidity, comprised of $3.5 billion of cash and $3.0 billion of available credit under our Senior Credit Facility. We currently have $6.5 billion of debt outstanding with no maturities until August 2023. We currently have approximately 25% and 30% of our anticipated remaining 2022 oil and gas production hedged, respectively.
25
These contracts consist of collars and swaps based off the WTI oil benchmark and the Henry Hub and NYMEX last day natural gas indices. Additionally, we have entered into regional basis swaps in an effort to protect price realizations across our portfolio.
As commodity prices and our operating performance strengthen and bolster our financial condition, we have authorized opportunistic repurchases of up to $2.0 billion of our common shares with an expiration date of May 4, 2023. We repurchased approximately 5.1 million shares in the second quarter of 2022 for approximately $318 million, or $63.07 per share. As of June 30, 2022, we have repurchased approximately 23.0 million shares for approximately $1.1 billion, or $49.44 per share, since the inception of the program. Additionally, we continue funding our fixed plus variable dividends, which totaled $1.5 billion in the first six months of 2022. We recently declared a dividend payable in the third quarter of 2022 for $1.0 billion and increased our fixed dividend by 13% beginning in the third quarter of 2022.
The following graphs, discussion and analysis are intended to provide an understanding of our results of operations and current financial condition. To facilitate the review, these numbers are being presented before consideration of noncontrolling interests.
Q2 2022 vs. Q1 2022
Our second quarter 2022 net earnings were $1.9 billion, compared to net earnings of $1.0 billion for the first quarter of 2022. The graph below shows the change in net earnings from the first quarter of 2022 to the second quarter of 2022. The material changes are further discussed by category on the following pages.
Production Volumes
Q2 2022
% of Total
Q1 2022
Change
Oil (MBbls/d)
Delaware Basin
74
209
Anadarko Basin
-5
Williston Basin
32
-13
Eagle Ford
Powder River Basin
300
100
288
Gas (MMcf/d)
618
561
210
54
-4
60
-2
-3
961
906
NGLs (MBbls/d)
71
92
N/M
156
Combined (MBoe/d)
436
394
-1
45
-6
36
616
575
From the first quarter of 2022 to the second quarter of 2022, the change in volumes contributed to a $224 million increase in earnings. The increase in volumes was primarily due to new well activity in the Delaware Basin as well as winter weather downtime experienced in the first quarter of 2022. We expect volumes to increase approximately 15 MBoe/d in the third quarter of 2022 due to the acquired Williston Basin assets in July 2022.
Realized Prices
Realization
Oil (per Bbl)
WTI index
108.70
94.45
Realized price, unhedged
108.93
100%
92.94
Cash settlements
(13.13
(11.32
Realized price, with hedges
95.80
88%
81.62
Gas (per Mcf)
Henry Hub index
7.17
4.96
6.37
89%
3.77
(1.31
(0.62
5.06
71%
3.15
NGLs (per Bbl)
40.28
37%
37.76
Combined (per Boe)
73.13
61.40
(8.43
(6.65
64.70
54.75
From the first quarter of 2022 to the second quarter of 2022, realized prices contributed to a $701 million increase in earnings. Unhedged realized oil, gas and NGL prices increased primarily due to higher WTI, Henry Hub and Mont Belvieu index prices. The increase in index prices was partially offset by hedge cash settlements related to oil and gas commodities.
We currently have approximately 25% and 30% of our anticipated remaining 2022 oil and gas production hedged, respectively.
Hedge Settlements
Q
(358
(293
-22
Natural gas
(114
-124
Total cash settlements (1)
(344
-37
Cash settlements as presented in the tables above represent realized gains or losses related to the instruments described in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Production Expenses
LOE
224
Gathering, processing & transportation
177
161
Production taxes
Property taxes
Per Boe:
4.56
4.33
3.11
Percent of oil, gas and NGL sales:
6.8
6.7
Production expenses increased from the first quarter of 2022 to the second quarter of 2022 primarily due to higher volumes. Production taxes also increased due to higher commodity prices.
Field-Level Cash Margin
The table below presents the field-level cash margin for each of our operating areas. Field-level cash margin is computed as oil, gas and NGL sales less production expenses and is not a measure defined by GAAP. A reconciliation to the comparable GAAP measures is found in “Non-GAAP Measures” in this Item 2. The changes in production volumes, realized prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.
$ per BOE
Field-level cash margin (Non-GAAP)
2,511
63.32
1,877
52.99
277
41.15
204
30.31
54.56
47.65
206
59.71
48.92
119
68.41
86
54.32
3,371
60.12
2,557
49.45
DD&A
Oil and gas per Boe
9.02
8.95
Oil and gas
506
463
-16
489
DD&A increased in the second quarter of 2022 primarily due to higher volumes resulting from new well activity and winter weather downtime experienced in the first quarter of 2022.
General and Administrative Expense
G&A per Boe
1.51
1.82
-17
Labor and benefits
44
58
-24
Non-labor
-11
G&A decreased in the second quarter of 2022 due to lower labor and benefit costs. The G&A per BOE rate also decreased in the second quarter of 2022 due to higher volumes resulting from new well activity and winter weather downtime experienced in the first quarter of 2022.
Other Items
Change in earnings
Commodity hedge valuation changes (1)
302
641
Marketing and midstream operations
Net financing costs
(61
(71
576
We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
For discussion on other, net, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Income Taxes
Current expense
103
Deferred expense
164
Total expense
267
For discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
June 30, YTD 2022 vs. June 30, YTD 2021
Our six months ended June 30, 2022 net earnings were $2.9 billion, compared to net earnings of $477 million for the first six months ended June 30, 2021. The graph below shows the change in net earnings from the six months ended June 30, 2021 to the six months ended June 30, 2022. The material changes are further discussed by category on the following pages.
216
181
-35
-21
-15
294
279
63
492
213
53
-12
-64
934
836
-19
146
114
415
70
334
47
-26
-23
595
533
From the six months ended 2021 to the six months ended 2022, the change in volumes contributed to a $341 million increase in earnings. The increase in volumes was primarily due to continued development in the Delaware Basin as well as increased activity in Eagle Ford. These increases were partially offset by lower volumes in the Williston Basin and Powder River Basin primarily due to natural declines.
101.57
61.95
101.14
59.65
(12.25
(11.30
88.89
48.35
6.06
2.77
5.11
84%
2.58
(0.97
4.14
68%
2.43
39.11
39%
24.37
(0.23
24.14
62
67.50
40.54
(7.57
(6.21
59.93
34.33
From the six months ended 2021 to the six months ended 2022, realized prices contributed to a $3.0 billion increase in earnings. Unhedged realized oil, gas and NGL prices increased primarily due to higher WTI, Henry Hub and Mont Belvieu index prices. The increase in index prices was partially offset by hedge cash settlements related to oil and gas commodities.
(651
(572
-14
(165
-650
-36
479
409
338
276
260
89
39
4.45
4.24
3.13
2.86
Production expenses increased primarily due to higher volumes as well as an increase in production taxes resulting from higher commodity prices.
4,388
58.45
1,997
33.00
481
35.73
17.20
431
51.01
358
31.42
364
54.49
29.50
61.67
141
34.36
59
5,928
55.00
2,940
30.48
8.99
9.83
-9
969
DD&A increased primarily due to higher volumes which was partially offset by lower DD&A rates. The decrease in DD&A
rates was primarily due to increases to oil, gas and NGL reserve estimates at December 31, 2021, resulting from higher prices.
1.66
2.08
-20
102
132
General and administrative expenses decreased primarily due to synergies resulting from the Merger.
(37
(632
(20
705
Asset dispositions include $65 million and $35 million in the first six months of 2021 related to the re-valuation of contingent earnout payments associated with our divested Barnett Shale assets and the sale of non-core assets in the Rockies, respectively. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Net financing costs include a $30 million gain in the first six months of 2021 related to debt retirements. For additional information, see Note 13 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Restructuring and transaction costs in the first six months of 2021 reflect workforce reductions in conjunction with the Merger, as well as various transaction costs related to the Merger. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Deferred expense (benefit)
Total expense (benefit)
Sources and Uses of Cash
The following table presents the major changes in cash and cash equivalents for the three and six months ended June 30, 2022 and 2021.
Operating cash flow
Equity method investment activity, net
Debt activity, net
(742
(1,302
Noncontrolling interest activity, net
(88
Operating Cash Flow and WPX Acquired Cash
As presented in the table above, net cash provided by operating activities continued to be a significant source of capital and liquidity. Operating cash flow more than doubled during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to significantly increased commodity prices as well as higher volumes for the first six months of 2022 compared to 2021.
Acquisitions of Property and Equipment
During the first six months of 2022, we paid an $87 million deposit towards the acquisition of producing properties and leasehold interests located in the Williston Basin, which was completed in July 2022. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Divestitures of Property and Equipment
During the first six months of 2022 and 2021, we received contingent consideration related to asset divestitures and sold non-core assets, respectfully. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Capital Expenditures
The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
Six months Ended June 30,
412
807
775
524
441
1,014
922
Midstream
57
Total capital expenditures
1,110
Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Our capital investment program is driven by a disciplined allocation process focused on moderating our production growth and maximizing our returns. As such, our 2022 capital expenditures represent approximately 25% of our operating cash flow.
Equity Method Investments
During the first six months of 2022 and 2021, Devon received distributions from our equity method investments of $23 million and $18 million, respectively. Devon contributed $43 million to our equity method investments during the first six months of 2022.
Debt Activity
Subsequent to the Merger closing, we redeemed $1.2 billion of senior notes in the first half of 2021. We also paid $59 million of cash retirement costs related to these redemptions.
Shareholder Distributions and Stock Activity
We repurchased approximately 9.0 million shares of common stock for $548 million in the first half of 2022 under the share repurchase program authorized by our Board of Directors. For additional information, see Note 16 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The following table summarizes our common stock dividends during the second quarter and total for the first six months of 2022 and 2021. In February 2022, our Board of Directors increased our fixed dividend rate by 45% to $0.16 per share and again by 13% to $0.18 per share beginning in the third quarter of 2022. In addition to the fixed quarterly dividend, we paid a variable dividend in the first and second quarters of 2022 and 2021.
Noncontrolling Interest Activity, net
During the first six months of 2022 and 2021, we distributed $13 million and $9 million, respectively, to our noncontrolling interests in CDM. During the first six months of 2021, we received contributions of $3 million related to our noncontrolling interests in CDM.
In the first quarter of 2021, we paid $24 million to purchase the noncontrolling interest portion of a partnership that WPX had formed to acquire minerals in the Delaware Basin.
Liquidity
The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, we, like all upstream operators, must continually make capital investments to grow and even sustain production. Generally, our capital investments are focused on drilling and completing new wells and maintaining production from existing wells. At opportunistic times, we also acquire operations and properties from other operators or landowners to enhance our existing portfolio of assets.
Historically, our primary sources of capital funding and liquidity have been our operating cash flow, cash on hand and asset divestiture proceeds. Additionally, we maintain a commercial paper program, supported by our revolving line of credit, which can be accessed as needed to supplement operating cash flow and cash balances. If needed, we can also issue debt and equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of our sources of capital will continue to be adequate to fund our planned capital requirements as discussed in this section as well as accelerate our cash-return business model.
Operating Cash Flow
Key inputs into determining our planned capital investment are the amount of cash we hold and operating cash flow we expect to generate over the next one to three or more years. At the end of the second quarter of 2022, we held approximately $3.5 billion of cash, inclusive of approximately $140 million of cash restricted primarily for retained obligations related to divested assets. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as actual results may differ from our expectations.
Commodity Prices – The most uncertain and volatile variables for our operating cash flow are the prices of the oil, gas and NGLs we produce and sell. Prices are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other highly variable factors influence market conditions for these products. These factors, which are difficult to predict, create volatility in prices and are beyond our control.
To mitigate some of the risk inherent in prices, we utilize various derivative financial instruments to protect a portion of our production against downside price risk. The key terms to our oil, gas and NGL derivative financial instruments as of June 30, 2022 are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” of this report.
Further, when considering the current commodity price environment and our current hedge position, we expect to achieve our capital investment priorities. Additionally, we remain committed to capital discipline and focused on delivering the objectives that underpin our capital plan for 2022. We will continue to prioritize economic value over growing volumes, which is driven partially by current commodity price backwardation, supply chain constraints and economic uncertainty arising from recent geopolitical events.
Operating Expenses – Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price decreases can lead to a decrease in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also decrease, causing a positive impact on our cash flow as the prices paid for services and equipment decline. However, the inverse is also generally true during periods of rising commodity prices. Furthermore, the COVID-19 pandemic has contributed to disruption and volatility in our supply chain, which has resulted, and may continue to result in labor shortages, increased costs and delays for pipe and other materials needed for our operations.
Credit Losses – Our operating cash flow is also exposed to credit risk in a variety of ways. This includes the credit risk related to customers who purchase our oil, gas and NGL production, the collection of receivables from our joint interest owners for their proportionate share of expenditures made on projects we operate and counterparties to our derivative financial contracts. We utilize a variety of mechanisms to limit our exposure to the credit risks of our customers, partners and counterparties. Such mechanisms include, under certain conditions, requiring letters of credit, prepayments or cash collateral postings.
Credit Availability
As of June 30, 2022, we had approximately $3.0 billion of available borrowing capacity under our Senior Credit Facility. This credit facility supports our $3.0 billion of short-term credit under our commercial paper program. At June 30, 2022, there were no borrowings under our commercial paper program, and we were in compliance with the Senior Credit Facility’s financial covenant.
Debt Ratings
We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels, cost structure, planned asset sales and production growth opportunities. Our credit rating from Standard and Poor’s Financial Services is BBB with a stable outlook. Our credit rating from Fitch is BBB+ with a stable outlook. Our credit rating from Moody’s Investor Service is Baa3 with a stable outlook. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements.
There are no “rating triggers” in any of our contractual debt obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. However, a downgrade could adversely impact our interest rate on any credit facility borrowings and the ability to economically access debt markets in the future.
Fixed Plus Variable Dividend
We are committed to a “fixed plus variable” dividend strategy. Our Board of Directors will consider a number of factors when setting the quarterly dividend, if any, including a general target of paying out approximately 10% of operating cash flow through the
fixed dividend. In February 2022, our Board of Directors increased our quarterly fixed dividend rate by 45% to $0.16 per share. We will raise it again by 13% to $0.18 per share beginning in the third quarter of 2022. In addition to the fixed quarterly dividend, we may pay a variable dividend up to 50% of our excess free cash flow, which is a non-GAAP measure. Each quarter’s excess free cash flow is computed as operating cash flow (a GAAP measure) before balance sheet changes, less capital expenditures and the fixed dividend. The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of our Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by the Board.
In May 2022, our Board of Directors increased our share repurchase program by $0.4 billion to a total authorized amount of $2.0 billion, and extended the expiration date to May 4, 2023. Through July 2022, we had executed $1.2 billion of the authorized program.
In July 2022, Devon completed our acquisition of producing properties and leasehold interest in the Williston Basin for cash consideration of approximately $830 million, net of purchase price adjustments.
Our 2022 exploration and development budget for the remainder of 2022 is expected to range from approximately $1.2 billion to $1.4 billion.
The amount of income taxes recorded requires interpretations of complex rules and regulations of federal, state, provincial and foreign tax jurisdictions. We recognize current tax expense based on estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Further, in the event we were to undergo an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended), our ability to use net operating losses and tax credits generated prior to the ownership change may be limited. Generally, an “ownership change” occurs if one or more shareholders, each of whom owns five percent or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percent over the lowest percentage of stock owned by those shareholders at any time during the preceding three-year period. Based on currently available information, we do not believe an ownership change has occurred during 2022 for Devon, but the Merger did cause an ownership change for WPX and increased the likelihood Devon could experience an ownership change over the next two years.
For additional information regarding our critical accounting policies and estimates, see our 2021 Annual Report on Form 10-K.
We make reference to “core earnings attributable to Devon” and “core earnings per share attributable to Devon” in “Executive Overview” in this Item 2 that are not required by or presented in accordance with GAAP. These non-GAAP measures are not alternatives to GAAP measures and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. Core earnings attributable to Devon, as well as the per share amount, represent net earnings excluding certain non-cash and other items that are typically excluded by securities analysts in their published estimates of our financial results. Our non-GAAP measures are typically used as a quarterly performance measure. Amounts excluded relate to asset dispositions, non-cash asset impairments (including non-cash unproved asset impairments), deferred tax asset valuation allowance, changes in tax legislation, fair
value changes in derivative financial instruments and foreign currency, costs associated with early retirement of debt and restructuring and transaction costs associated with the workforce reductions described further in Note 5.
We believe these non-GAAP measures facilitate comparisons of our performance to earnings estimates published by securities analysts. We also believe these non-GAAP measures can facilitate comparisons of our performance between periods and to the performance of our peers.
Below are reconciliations of core earnings and core earnings per share attributable to Devon to comparable GAAP measures.
Before Tax
After Tax
After NCI
Per Diluted Share
Earnings attributable to Devon (GAAP)
Adjustments:
(11
(0.02
Asset and exploration impairments
0.01
0.02
Fair value changes in financial instruments
(299
(230
(0.35
0.05
Core earnings attributable to Devon (Non-GAAP)
2,190
1,713
1,707
2.59
3,789
2,974
2,962
4.46
(67
(0.10
(91
(115
(0.17
(378
Change in tax legislation
0.09
Fair value changes in financial instruments and foreign currency
258
628
483
0.72
0.03
183
0.28
(0.01
(23
(0.03
565
413
408
0.60
714
706
1.06
EBITDAX and Field-Level Cash Margin
To assess the performance of our assets, we use EBITDAX and Field-Level Cash Margin. We compute EBITDAX as net earnings before income tax expense; financing costs, net; exploration expenses; DD&A; asset impairments; asset disposition gains and losses; non-cash share-based compensation; non-cash valuation changes for derivatives and financial instruments; restructuring and transaction costs; accretion on discounted liabilities; and other items not related to our normal operations. Field-Level Cash Margin is computed as oil, gas and NGL sales less production expenses. Production expenses consist of lease operating, gathering, processing and transportation expenses, as well as production and property taxes.
We exclude financing costs from EBITDAX to assess our operating results without regard to our financing methods or capital structure. Exploration expenses and asset disposition gains and losses are excluded from EBITDAX because they generally are not indicators of operating efficiency for a given reporting period. DD&A and impairments are excluded from EBITDAX because capital expenditures are evaluated at the time capital costs are incurred. We exclude share-based compensation, valuation changes, restructuring and transaction costs, accretion on discounted liabilities and other items from EBITDAX because they are not considered a measure of asset operating performance.
We believe EBITDAX and Field-Level Cash Margin provide information useful in assessing our operating and financial performance across periods. EBITDAX and Field-Level Cash Margin as defined by Devon may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net earnings from operations.
Below are reconciliations of net earnings to EBITDAX and a further reconciliation to Field-Level Cash Margin.
Net earnings (GAAP)
Derivative and financial instrument non-cash valuation changes
(302
336
632
Accretion on discounted liabilities and other
EBITDAX (Non-GAAP)
2,833
1,201
4,968
2,160
Marketing and midstream revenues and expenses, net
Commodity derivative cash settlements
367
816
599
General and administrative expenses, cash-based
1,641
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
As of June 30, 2022, we have commodity derivatives that pertain to a portion of our estimated production for the last six months of 2022, as well as for 2023 and 2024. The key terms to our open oil, gas and NGL derivative financial instruments are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The fair values of our commodity derivatives are largely determined by the forward curves of the relevant price indices. At June 30, 2022, a 10% change in the forward curves associated with our commodity derivative instruments would have changed our net positions by approximately $155 million.
Interest Rate Risk
As of June 30, 2022, we had total debt of $6.5 billion. All of our debt is based on fixed interest rates averaging 5.8%.
Foreign Currency Risk
We had no material foreign currency risk at June 30, 2022.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to Devon, including its consolidated subsidiaries, is made known to the officers who certify Devon’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2022 to ensure that the information required to be disclosed by Devon in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are involved in various legal proceedings incidental to our business. However, to our knowledge as of the date of this report and subject to the environmental matters noted in Part I, Item 3. Legal Proceedings of our 2021 Annual Report on Form 10-K, there were no material pending legal proceedings to which we are a party or to which any of our property is subject.
Please see our 2021 Annual Report on Form 10-K and other SEC filings for additional information.
Item 1A. Risk Factors
There have been no material changes to the information included in Item 1A. “Risk Factors” in our 2021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding purchases of our common stock that were made by us during the second quarter of 2022 (shares in thousands).
Total Number ofShares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1 - April 30
1,352
60.47
1,187
709
May 1 - May 31
2,114
65.27
2,104
972
June 1 - June 30
1,762
62.15
1,761
862
5,228
62.97
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit
Number
Description
10.1*
Devon Energy Corporation 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, filed June 8, 2022; File No. 333-265472).
10.2*
2022 Form of Notice of Grant of Restricted Stock Award and Award Agreement under the 2022 Long-Term Incentive Plan between the Company and all non-management directors for restricted stock awarded.
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 2, 2022
/s/ Jeremy D. Humphers
Jeremy D. Humphers
Senior Vice President and Chief Accounting Officer